Portfolio evaluation and correcting for the wealth effect

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7Wannabe5
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Re: Portfolio evaluation and correcting for the wealth effect

Post by 7Wannabe5 »

Shouldn't the question of why earnings are low relative to price be considered as well as why price is high relative to earnings? Maybe frugality is catching on? :lol: Maybe passivity is becoming increasingly expensive?

I was reading an interview in Barron's (can't recall name) with somebody quite intelligent who made the point that there is a level beyond the wisdom in simply not believing "It's different this time." The economy and the market are complex evolving systems, so strategies have to change. At some point previous benchmarks must be abandoned. For instance, the very secure investment strategy outlined in YMOYL wouldn't work so well nowadays. There are underlying mechanics beyond statistics and indices even in regards to such factors as irrational exuberance of the mob. How is the Robinhood investor of 2020 like the Newsboy Investor of 1928? How might he be different? Etc.

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unemployable
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Re: Portfolio evaluation and correcting for the wealth effect

Post by unemployable »

7Wannabe5 wrote:
Sun Jan 10, 2021 8:04 am
The economy and the market are complex evolving systems, so strategies have to change. At some point previous benchmarks must be abandoned.
Probably most importantly, the Greenspan put didn't exist before 1987, although some previous crashes were accompanied by a fair amount of intervention by private parties, most notably 1907. (Monetary policy tightened after 1929.) How to correctly value this option and account for its potential "expiration" is a separate issue, but for now the strike price seems to be in the down 40-50% range.

In addition, share buybacks have become a more popular way to return profits to shareholders versus dividends. This should raise P/Es for a couple reasons: due to favorable tax treatment (zero for buybacks until you sell vs. 30%+ for dividends immediately if you're rich and live in a high-tax state), and due to a promised lower P/E after the buyback due to fewer outstanding shares.

ertyu
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Re: Portfolio evaluation and correcting for the wealth effect

Post by ertyu »

Quadalupe wrote:
Sun Jan 10, 2021 7:52 am

The value of a 60% S&P500 and 40%10Yr Treasury portfolio currently is 0.6*15.81/38.43 + 0.4 * 1.119/3.84 = 36%.
ouch

i hate this situation. on the one hand, now is a terrible, horrible, bad, no good time to put cash into the market. on the other hand, it keeps going up and up and the amount of real assets one can buy with any given level of cash is less and less. everyone is having fun except this apparent permabear here

2Birds1Stone
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Re: Portfolio evaluation and correcting for the wealth effect

Post by 2Birds1Stone »

ertyu wrote:
Mon Jan 11, 2021 2:05 pm
everyone is having fun except this apparent permabear here
non solum

Married2aSwabian
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Re: Portfolio evaluation and correcting for the wealth effect

Post by Married2aSwabian »

@7Wannbe5, yes, I subscribed to Barron’s again starting last summer. I try to keep up with market week data, but always read Up and Down Wall St (Alan Abelson was the best back in the day!) and Streetwise. Yesterday, both columns are pointing to the Barron’s Panic / Euphoria Index as a flashing red light that equities are wildly overvalued, with Euphoria off the charts. Jack Haugh writes about the same “shoe shine boy” / “newspaper boy” trader indicator. Could things go higher still, with the Fed keeping rates at zero for another couple of years? Sure. Is a big correction due in the next six months? Seems very likely.

As Mark Twain said, “History doesn’t repeat itself, but it often rhymes.” If you look at the 1918 pandemic curve, it is very similar to what we’re experiencing now: second wave in winter more deadly than the first, people got sick of wearing masks and social distancing and spread it around more.

I added some light reading to my list just before the pandemic began: “The Great Crash 1929” by John Kenneth Galbraith.

He outlines the wild euphoria leading up to the crash (like today), with huge amounts of leverage being used to invest. Of course, there was no SEC or regulation back then, so it was worse - kind of the Wild West of Wall St, with plenty of larger than life characters running in to save the day when things got dire. Hoover made things much worse by worrying about balancing the budget after the crash, so no fiscal stimulus to get through it.

There are plenty of similarities, though, with the easy money and euphoria. There was also a substantial rebound after late Oct, ‘29, but not new highs. This was a dead cat bounce that was followed by many subsequent dead cat bounces until the market had lost 85% of its value.

Some big differences this time include China, the interconnectedness of the global economy and fiscal stimulus.

I’m afraid we’re in for a correction period that will last a couple of years, but not be nearly as bad as back then. The other historical comparison that could result from the unprecedented decade plus of money printing is the “lost decade” of the ‘90s in Japan. Wild times for sure!

IlliniDave
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Re: Portfolio evaluation and correcting for the wealth effect

Post by IlliniDave »

Is there really euphoria at the present time? There's a net appetite for buying stocks, but I get the sense that a lot of investors see it as the best (only?) move on a game board that is stacked against them.

Seems like businesses are going to get hit with additional friction, which would be my bet for the precipitant. But I don't believe that prediction enough to make more than a modest hedge.

7Wannabe5
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Re: Portfolio evaluation and correcting for the wealth effect

Post by 7Wannabe5 »

@Married2aSwabian:

Yeah, I read that article too. Interesting. I am too cheap to buy my own subscription to Barron’s but I kind of inherited a subscription from a wealthy friend along with some shares of GOOGL, so it’s been added to my recent reading stack.

@IlliniDave:

If barriers to entry to the stock market have gone down, where are barriers to entry for investment still high? IOW, what lies beyond the edge of the game board?

IlliniDave
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Re: Portfolio evaluation and correcting for the wealth effect

Post by IlliniDave »

7Wannabe5 wrote:
Mon Jan 18, 2021 10:25 am

@IlliniDave:

If barriers to entry to the stock market have gone down, where are barriers to entry for investment still high? IOW, what lies beyond the edge of the game board?
I don't know that barriers to the stock markets are materially any lower than they have been for a couple decades at least. High barriers? I dunno, private equity and hedge funds? Not things that an everyday retirement saver is going to have access to I don't think.

thedollar
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Re: Portfolio evaluation and correcting for the wealth effect

Post by thedollar »

Quadalupe wrote:
Sun Jan 10, 2021 7:52 am
Well, if we look at the 10Yr Treasury rate now, it's 1.119% (per https://www.cnbc.com/quotes/?symbol=US10Y).

The value of a 60% S&P500 and 40%10Yr Treasury portfolio currently is 0.6*15.81/38.43 + 0.4 * 1.119/3.84 = 36%. Over 20 percent points lower than a year ago.
How come bonds are considered overvalued? I thought bonds would have low volatility (+- 10%), but in this calculation they are considered more volatile than stocks?

thedollar
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Re: Portfolio evaluation and correcting for the wealth effect

Post by thedollar »

ertyu wrote:
Mon Jan 11, 2021 2:05 pm
ouch

i hate this situation. on the one hand, now is a terrible, horrible, bad, no good time to put cash into the market. on the other hand, it keeps going up and up and the amount of real assets one can buy with any given level of cash is less and less. everyone is having fun except this apparent permabear here
I hate it as well. Even in 2017 when I had a lump sum to invest, I thought that things were way too high.

I think you've got to be in the market despite these valuations... Maybe just 30%? 50%? Maybe 60% if you can take the risk.

The rest of the allocation can be dollar cost averaged into the market during 4-5 years or be used to buy if everything crashes.

You have to be in the market because it's pretty clear that we can't predict the future. We can look to history, but then again everything might be different this time around. Maybe it isn't but no one knows.

IlliniDave
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Re: Portfolio evaluation and correcting for the wealth effect

Post by IlliniDave »

thedollar wrote:
Tue Jan 19, 2021 4:03 am
How come bonds are considered overvalued? I thought bonds would have low volatility (+- 10%), but in this calculation they are considered more volatile than stocks?
I don't know if 'overvalued' is the right word. I think the point is that interest rates are lower than the historic average. If one believes bond interest rates should be the historic rate then the bonds out there today should be worth less, and indeed if interest rates jumped back up to average historic values the price of bonds would fall. In theory if interest rates became more volatile than stocks, bonds might become more volatile than stocks. But with bonds you always know what the bond will pay and when (barring default), so there is an underlying stability to them in nominal <whatever currency they are denominated in>.

7Wannabe5
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Re: Portfolio evaluation and correcting for the wealth effect

Post by 7Wannabe5 »

“IlliniDave” wrote: I don't know that barriers to the stock markets are materially any lower than they have been for a couple decades at least. High barriers? I dunno, private equity and hedge funds? Not things that an everyday retirement saver is going to have access to I don't think.
I guess my perspective is that Robinhood and similar app enhanced easy access to zero cost trading and fractional shares etc does represent the lowering of a barrier to entry.

I don’t know the answer to the chessboard question either, but the analogy itself suggests the questioning of the boundary. Tools, copyright, patents, franchise, timber, pawn shop, ???

IlliniDave
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Re: Portfolio evaluation and correcting for the wealth effect

Post by IlliniDave »

7Wannabe5 wrote:
Tue Jan 19, 2021 6:47 am
...
I don’t know the answer to the chessboard question either, but the analogy itself suggests the questioning of the boundary. Tools, copyright, patents, franchise, timber, pawn shop, ???
Gotcha, but in my mind the barrier to stock ownership has been down for some time. Once people could get online anytime they felt like it and for modest commission (I always think of Schwab) buy and sell, the only barrier was having money and desire to invest. No doubt it has gotten cheaper and more convenient.

Regarding the high barrier off the game board candidates, there's lots of things in the realms of speculation and business venture that can be profitable, I agree. Guess I was limiting my thinking to financial investments (private equity could cover some of the example ventures you suggest) for people whose occupation is other than growing money.

7Wannabe5
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Re: Portfolio evaluation and correcting for the wealth effect

Post by 7Wannabe5 »

I think in the olden days you either had enough cash savings to open a brokerage account (maybe $5000?)or you had enough cash savings to put a down payment on a house. So, most people would usually do the second prior to the first. Therefore, it was a significant barrier to entry for young people of median or less income. It’s still the case that most people do not have equity investments outside of managed or limited choice retirement funds, but with apps that make it as easy as sports gambling, I think that is changing.

So, I guess what I’m trying to puzzle out is whether there are some realms of investment that do not require millions as barrier to entry, but do still require some modest stake like $10,000?

IlliniDave
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Re: Portfolio evaluation and correcting for the wealth effect

Post by IlliniDave »

7Wb5, dunno the answer to that question.

Stock ownership has actually declined slightly over the last 20 years if you go by % of US households that own stocks. The following does not break it out by in a retirement plan versus outside, or in a mutual fund versus individual stocks. But to say individual trading is on the rise you'd have to say retirement plan participation is waning and mutual fund ownership is waning I think. Given we are overdue our semi-annual OMG index funds are swallowing the whole world because of bad salarymen thread, I not sure I would bet on those conditions.

https://news.gallup.com/poll/266807/per ... stock.aspx

7Wannabe5
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Re: Portfolio evaluation and correcting for the wealth effect

Post by 7Wannabe5 »

@IlliniDave:

Interesting. I don’t quite know how to rectify that article with this article.
Before Robinhood, anyone who wanted to invest in stocks, ETFs or options would be charged between $5 to $10 a trade. They also needed to invest a minimum of $500 to open an account.
Vladimir Tenev and Baiju Bhatt (co-founders) had previous experience building these systems and saw the extraneous costs as little more than gatekeeping younger and poorer people out of investing.
https://www.businessofapps.com/data/ro ... tatistics/

My perspective is likely a bit biased because I had the experience this summer of observing my Uber-wealthy friend teach some of his hospice nursing aides how to start investing on their smart phones. Also, since I was practically forced to watch CNBC for many hours every day during this interval, I noticed how the commentators changed their opinions on the Robinhood investors after they bought in heavy on the post-Covid dip.

Also, I put some fun money on Robinhood myself, just because I was curious, and did so well I had to stop considering it to be fun money :lol: (My serious money is invested with Fidelity or Cash in Bank.) So, I am also wondering to what extent something roughly analogous to “the media is the message” might apply? If the interface makes the process seem difficult then more people will maybe just look at their account once a year and maybe rebalance. If the interface makes it seem easy and fun, then more people will participate more often. Dunno.

IlliniDave
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Re: Portfolio evaluation and correcting for the wealth effect

Post by IlliniDave »

7Wb5, I think maybe Robinhood is a solution whose problem has not arrived yet. The takeaway I get from declining household stock ownership rates is that it reflects concentration of wealth in the stratospheric economic cohorts. I suspect it is members of the post Great Recession workforce entrants who are investing at a lower rate than their predecessors, many of whom are un- or underemployed. Seems we're poised to toss a handful of coarse sand into the gears so I fear that will continue and worsen.

In the US $5 a trade and a $500 minimum balance wouldn't necessarily be a barrier to most who would be inclined to be savers/investors of the sort who are starting a long-term slog towards building a retirement stash. It just eliminates a little bit of a time delay. It appears their usage is growing so maybe over time they'll recruit a cohort of investors that otherwise wouldn't bother. However, anyone for whom cobbling together $500 is a true barrier maybe shouldn't be fooling with the stock market.

7Wannabe5
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Re: Portfolio evaluation and correcting for the wealth effect

Post by 7Wannabe5 »

“IlliniDave” wrote: However, anyone for whom cobbling together $500 is a true barrier maybe shouldn't be fooling with the stock market.
I think this was the conventional wisdom on Robinhood, but maybe that has changed? Or, as your article would indicate, maybe the Robinhood users aren’t who they were believed to be? Once again, dunno.

Anyways, I agree that increasing economic inequality is worrisome.

IlliniDave
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Re: Portfolio evaluation and correcting for the wealth effect

Post by IlliniDave »

7Wannabe5 wrote:
Wed Jan 20, 2021 11:34 am
I think this was the conventional wisdom on Robinhood, but maybe that has changed? Or, as your article would indicate, maybe the Robinhood users aren’t who they were believed to be? Once again, dunno.

Anyways, I agree that increasing economic inequality is worrisome.
I'd guess in the 2015-2018 time frame a fair number of users might have come from other platforms to take advantage of the $0 trading commissions.I'm not sure what the demographics of Robinhood users are. It would be interesting to know.

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